More than 300 customers who bought 'toxic' sofas from Land of Leather, which caused rashes and burns, will not receive compensation a high court judge ruled yesterday.

The Chinese-manufactured leather sofas, which were also sold by Walmsley Furnishing and Argos, caused skin allergies, rashes and burns on more than 4,000 people in the UK.

The sofas were manufactured by a company called Linkwise using the chemical dimethyl fumerate, an anti-mould agent used to protect leather which is toxic in tiny amounts and can cause serious blistering and bleeding of the skin. One elderly customer even had her pet dog put down, wrongly believing it was the cause of her rashes.

The chemical has since been banned from use in imported products after consumers in at least five EU countries suffered skin burns and breathing problems, according to Russell Jones and Walker, the solicitors which represented the claimants.

Richard Langton, senior litigation partner at Russell Jones and Walker, who described the ruling as a "devasting blow", said a clause in Land of Leather's insurance policy had allowed Zurich to avoid paying compensation.

"The contract contains one condition which, if breached, rendered the insurance policy void. This condition was that Land of Leather should not settle claims without permission from the insurer," he said.

"When Land of Leather realised Linkwise sofas were damaging its reputation, it sought compensation from Linkwise, and the company agreed to pay Land of Leather $900,000. Zurich was consulted on and agreed to this.

"But Linkwise then failed to pay up, so Land of Leather went back for more discussions. They slightly changed the terms of the agreement and Linkewise paid the $900,000, but this time Zurich was not consulted, which the insurer said rendered the insurance null and void."

The claimants have been given leave to appeal, and Langton said he believed they had grounds on the basis that the insurance policy would only be rendered void if Zurich were not consulted on a claim made against Land of Leather.

"In this case, Land of Leather was making the claim against another company. It is quite the opposite," he said.

Langton also criticised the length of time it took for Zurich to make clear the reason for which it was rejecting the claims. "Zurich's delay in notifying us added insult to injury by making our clients believe they would be paid," he said. "Unless this decision is overturned on appeal by the court of appeal a great injustice will have been done."

A spokesperson for Zurich said the high court ruling confirmed that Land of Leather had breached "fundamental terms" of its insurance policy, which meant it did not provide an indemnity for customers injured by the Linkwise sofas. They added: "Zurich remains committed, wherever possible, to the prompt resolution of personal injury claims unaffected by today's ruling.

"As the group litigation in relation to such claims is ongoing, it is not appropriate to make further comment at this time."